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Commerce Bancshares Reports in Line

HBAN CBSH

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Commerce Bancshares Inc.’s (CBSH - Analyst Report) fourth-quarter 2012 earnings of 72 cents per share were in line with the Zacks Consensus Estimate as well as the prior quarter’s earnings. However, this compared favorably with the year-ago quarter’s earnings of 66 cents.

For the full year 2012, Commerce Bancshares recorded earnings per share of $2.90 compared with $2.69 in 2011. However, the earnings marginally missed the Zacks Consensus Estimate of $2.92.

Results for the quarter were aided by augmented top line, partly offset by higher expenses. Credit quality and capital ratios showed mixed trends. However, sustained growth in loans and deposits were the highlights for the quarter

Net income for the quarter was $66.8 million, up 1.2% sequentially and 8.6% on a year-over-year basis. For 2012, net income stood at $269.3 million, up 5.1% from $256.3 million in 2011.

Performance Details

Commerce Bancshares’ total revenue was $273.5 million, up 3.6% from $264.1 million in the prior quarter and 2.3% from $267.3 million in the year-ago quarter. Total revenue was 3.6% ahead of the Zacks Consensus Estimate of $264.0 million.

For 2012, total revenue came in at $1.07 billion, dipping 1.2% from $1.09 billion in 2011. However, total revenue surpassed the Zacks Consensus Estimate of 1.05 million by 2.8%.

Taxable equivalent net interest income was $168.4 million, rising 5.3% sequentially. The increase was largely attributable to higher inflation interest on the company's inflation-protected securities.

Non-interest income grew 2.4% from the previous quarter to $103.3 million. The sequential improvement was mainly due to higher bankcard transaction fees, trust fees deposit account charges and other fees, consumer brokerage services as well as other income, partly offset by lower capital market fees.

Non-interest expense hiked 3.2% from the prior quarter to $158.3 million. The increase was mainly attributable to higher salaries and employee benefits, supplies and communication expenses, equipment costs, other expenditure, deposit insurance expenses, partly mitigated by lower marketing costs, net occupancy costs as well as data processing expenses.

Efficiency ratio decreased to 59.62% from 59.99% in the prior quarter. The decline implies a hike in profitability.

Credit Quality

Commerce Bancshares reported a mixed credit quality during the quarter. Total nonperforming assets came in at $64.9 million, down 11.7% sequentially and 30.9% from prior-year quarter. Further, allowance for loan losses as a percentage of total loans was 1.75%, down from 1.82% in the prior quarter and 2.01% in the previous-year quarter.

However, net charge-offs escalated 18.7% sequentially, but deteriorated 30.8% year over year to $10.8 million. Likewise, provision for loan losses stood at $8.3 million in the quarter, up 49.2% from the previous quarter, but down 31.4% from the year-ago quarter.

Balance Sheet

Average loans (excluding loans held for sale) inched up 1.8% from the previous quarter and 5.7% from the comparable quarter last year to $9.6 billion. Further, total deposits improved 8.9% sequentially and 9.2% year over year to $18.3 billion, reflecting growth in non-interest bearing deposits and savings, interest checking and money market deposits.

Capital and Profitability Ratios

Commerce Bancshares’ capital ratios deteriorated in the quarter. Tier I leverage ratio came in at 9.14%, down from 10.00% in the prior quarter and 9.55% in the prior-year quarter. Tangible common equity to assets ratio as of Dec 31, 2012 was 9.25%, down from 10.47% as of Sep 30, 2012 and 9.91% as of Dec 31, 2011.

The company’s return on average assets was 1.25% compared with 1.28% as of Sep 30, 2012 and 1.19% as of Dec 31, 2011. Additionally, the company’s return on average equity increased to 11.62% from 11.57% as of Sep 30, 2012 and 11.39% as of Dec 31, 2011.

However, book value, based on total equity as of Dec 31, 2012, was $23.76 per share, down from $25.08 as of Sep 30, 2012 and $23.24 as of Dec 31, 2011.

Share Repurchase

During the quarter, Commerce Bancshares repurchased 774,000 shares at an average price of $37.93 per share.

Our Viewpoint

Strong capital base and an excellent liquidity enable Commerce Bancshares to position itself comfortably for expansion via acquisitions. Moreover, the company’s direct retail and commercial banking franchise are expected to perform steadily. Its focus on developing in the high-growth areas and efforts to reorganize expenses would also prove accretive to overall growth in the future.

However, prevailing low interest rates, diminishing loan demands and muted economic growth are expected to hurt Commerce Bancshares’ overall performance. Also, the recently proposed financial rules and the stringent regulatory landscape are matters of concern.

One of Commerce Bancshares peers, Huntington Bancshares Incorporated (HBAN - Analyst Report), which holds a Zacks Rank #2 (Buy), is expected to announce its fourth quarter 2012 results on Jan 17.

Commerce Bancshares currently retains a Zacks Rank #3 (Hold). Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

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